Under the USTR plan, the three Nafta countries would need to “opt in” to the ISDS system in the future — essentially making participation in the system voluntary, say individuals briefed on the plan. Mexico, for instance, could decide to keep the arbitration system as a way to give investors confidence that disputes won’t drag out in the Mexican court system, which has long been criticized for delays and corruption.

The USTR is circulating its plan to other agencies and the White House,
which haven’t yet given their approval. The U.S. is trying to put
together concrete plans to submit to Mexico and Canada in time for the
third round of Nafta negotiations next month in Canada, which will
follow a second round beginning Sept. 1 in Mexico City.

A spokeswoman for the agency declined to comment on the proposal.

The plan is generating opposition among business groups and on Capitol Hill. “The business community supports no fundamental change” in the ISDS system,
said Vanessa Sciarra, a trade specialist at the National Foreign Trade
Council, an organization representing big U.S. exporters. Early this
month, more than 100 U.S. trade associations sent a letter to the
administration supporting the system as “a core element to protect the
United States against the theft, discrimination and unfair treatment of
U.S. property overseas.”

The U.S. stance is among several evolving positions that put the administration at odds with big business, which has the potential to unleash its lobbying power among lawmakers
to put pressure on U.S. negotiators and, potentially, prompt members of
Congress to vote against the final pact when it comes to Capitol Hill.

Already
the U.S. side has suggested it wants to require a “substantial” portion
of autos and auto parts produced under the pact be made in the U.S.–an idea Detroit auto makers generally oppose.

In the case of the
dispute-settlement system, business officials fear that should the U.S.
scrap the system, other countries would be bound to do the same.
“It’s just a transparent excuse to delete the [arbitration] procedure,”
said Jeffrey Schott, a trade expert at the Peterson Institute for
International Economics, a free-trade think tank.

USTR hasn’t briefed Mexican or Canadian negotiators on its proposal in detail, said individuals familiar with the plan.

Carlos Véjar, a trade attorney at law firm Holland and Knight in Mexico City, said the panels are of more benefit to the U.S. given that it invests more in Mexico than vice versa. The U.S. accounted for 52% of the $15.6 billion in foreign direct investment in Mexico in the first half of this year [2017].

Mexico has recently opened its
energy industry to foreign investment, for instance, a sector likely to
draw substantial investment, he said. Brazil, he noted, gets plenty of
foreign investment even though it isn’t party to an ISDS system.

The new courts would have a roster of 15 tribunal members bound
by tough conflict-of-interest rules. Grounds for suing under the
arbitration system would be narrowed. The EU and Canada also created an
appellate body to review decisions for legal errors and some other
issues. Nafta doesn’t provide for an appeals process.

It isn’t clear whether the U.S. would consider those changes sufficient should Canada propose them as part of the current Nafta negotiations.

Additionally, she said, if the U.S. were to withdraw from the ISDS system while Mexico and Canada stayed in the body, U.S.
companies would have an incentive to move their operations out of the
U.S. to take advantage of the extra legal protections afforded by the
system.

“You may be including an additional
incentive to move production to Mexico by leaving in this legal
provision that investors could find very valuable,” Ms. Drake said.”